Fla. teachers fume as pension fund buys Edison for $174M

Gregg W. Downey, Editor

January 1st, 2004

Acting through a captive money management firm, the Florida Retirement System–whose members consist primarily of public school teachers and other public-sector employees–will pay off the debts and buy out the shareholders of the for-profit education firm Edison Schools Inc., it was revealed Nov. 12.

Reported price tag: $174 million.

The Florida Retirement System is chaired by Republican Gov. Jeb Bush, who supported the purchase despite vigorous objections from teacher unions and some investment experts. The decision to buy Edison, which has used school technology as a key sales point in its efforts to take over troubled public schools, is the most controversial move by the $92 billion pension fund since 2001. That’s when the fund lost a reported $325 million buying plummeting shares of Enron stock.

In New York City on Nov. 12, Edison shareholders quickly approved the management-led deal.

“Today’s vote is an important step in an exciting new chapter in Edison’s history,” said Chris Whittle, Edison’s founder and chief executive officer. “As we return to being a private company, Edison’s mission–to help our partners provide a world-class education to every child we serve–remains unchanged. We will continue to partner with school districts, charter boards, public school teachers, and community organizations to raise student achievement through schools and programs.”

Edison has been at the center of public debate about for-profit education. Disappointments with some big contracts and complaints about its performance helped cause Edison’s share price to plunge.

Liberty Partners, one of the Florida pension fund’s money managers, will own 96.3 percent of Edison. Liberty invests a small portion of Florida’s state pension fund. But the pension fund is the only client for which Liberty currently invests money.

In response to objections from teachers and Florida Democrats, Gov. Bush said financial decisions should be based on the bottom line: “We shouldn’t be making decisions based on politics.”

Edison posted its first quarterly profit in its 12-year history during the quarter ended June 30.

In an unsuccessful effort to head off the deal, Doug Wiles of St. Augustine, Democratic leader of the Florida House of Representatives, recently put his key objections into a letter to Gov. Bush.

“Our public employees have dedicated their lives to public service, and I’m certain that the majority would not approve of a significant investment in a business that seeks to eliminate their own jobs,” he wrote. He called on the state to cut all ties to Edison, adding: “We must take steps to ensure that the State of Florida is not in the business of bailing out failing private companies.”

Edison went public four years ago with shares initially trading at $18. Edison stock crested at $36.75 in 2001, but fell last year to a low of 15 cents a share. On the day of the announcement, its stock price rose, selling at $1.74 a share.

One financial analyst who follows Edison went on the record to praise the deal.

“It’s something of a steal,” said Trace Urdan, of San Francisco’s ThinkEquity Partners, in an interview with Florida’s St. Petersburg Times. The newspaper quoted Urdan as saying Edison has done a good job cutting costs, getting out of unprofitable contracts, and focusing more attention on less-controversial aspects of its business, such as running after-school programs and licensing some of its software.

According to Urdan, one benefit of the deal is that Edison once again will become a private company. That means it will be free to operate without the disclosure required of public corporations. “When they become private,” Urdan said in his Times interview, “they don’t have to tell the public anything. It will be much more difficult for unions and critics to go after things.”

Regardless of the merits or demerits of the investment for the Florida Retirement System, the deal looks good for Edison’s current owners, especially Whittle. According to news reports, Edison executives, including Whittle, will immediately get some $9 million for their shares and options.

The company will be required to purchase up to $7 million in additional shares from Whittle over the next five years, it was reported. He also is said to have a five-year employment agreement that will pay him an annual salary of at least $600,000 with a potential for a bonus of 275 percent of his base salary, in addition to other benefits.